Product Market Competition and Agency Conflicts: Evidence from the Sarbanes Oxley Act
University of Miami
Rice University - Jesse H. Jones Graduate School of Business
Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC) Herzliyah
Johnson@Cornell Tech, Cornell University; Interdisciplinary Center (IDC)
We use the Sarbanes Oxley Act (SOX) as a natural experiment of a shock to internal governance to examine the link between product market competition and internal governance mechanisms. Consistent with the notion that product market competition is a close substitute for internal governance, we find that firms in concentrated industries experienced a larger improvement in operational efficiency after the approval of SOX than did firms in non-concentrated industries. These gains in efficiency appear to come from a significant reduction in production and administrative costs. Several robustness tests confirm that our main results are not driven by unobservable factors unrelated to changes in corporate governance.
Date posted: March 19, 2008 ; Last revised: November 23, 2015